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27 May 2010
MARKET DATELINE
♦ Missed consensus. Excluding RM69m forex and disposal gains, adjusted RHBRI Vs. Consensus
FY03/10 net profit of RM263.6m came in within our forecast but missed Above
the market consensus by a whopping 15%. In Line
construction orderbook currently stands at about RM3.6bn with the key Issued Capital (m shares) 1,333.6
projects being Besraya Elevated Expressway (RM600m), Grand Hyatt Hotel Market Cap(RMm) 5,974.6
in KL (RM400m), road projects in India (RM1bn) and building jobs in the Daily Trading Vol (m shs) 2.8
Gulf states (RM400m). 52wk Price Range (RM) 3.79-5.01
♦ RM2bn new orderbook guidance stands. It is confident about securing Major Shareholders: (%)
EPF 19.5
RM2bn new contracts per annum. Locally, IJM is eyeing, among others,
Zelan 8.6
the remaining upstream packages of the Pahang-Selangor Interstate Raw Amanah Saham B’putera 5.5
Water Transfer project, runway of the new LCCT, Ampang and Kelana Jaya
LRT line extension project and selective project under the SCORE in FYE Mar FY11 FY12 FY13
Sarawak. On the overseas front, IJM’s key focus is on road projects in EPS Revision (%) - - -
Var to C.EPS (%) +6 -7 na
India including the possibility of participating as concessionaires.
♦ Murum access road project not “tactical”, but profit-driven. While PE Band Chart
we gathered from our sources that IJM had won the two Murum access
PER = 20x
road work packages on “brutally competitive” prices, IJM assured that it PER = 16x
PER = 12x
“knows the Sarawak market very well” and the job is not “tactical” but PER = 8x
profit-driven.
♦ Forecasts. Maintained.
♦ Risks. The risks include: (1) New contracts secured coming in below our
target of RM2bn p.a.; and (2) Steep increases in input costs.
♦ We are Neutral on the construction sector. On one hand, we foresee
Relative Performance To FBM KLCI
improved investors’ risk appetite for construction stocks following: (1) The
massive underperformance of the sector vis-à-vis the market in 4Q2009
FBM KLCI
and 1Q2010; and (2) A better sector news flow and new expectations
leading up to the announcement of the 10th Malaysia Plan (10MP) in June
2010. On the other hand, certain negative elements remain such as: (1)
IJM Corporation
The still slow pace of the roll-out of public projects, shrinking margins and
declining dominance of established players in large-scale projects locally;
and (2) The not-so-rosy outlook and increased operating risks in key
overseas markets.
♦ Maintain Market Perform. Indicative fair value is RM4.88 based on 16x
fully-diluted EPS of 30.5sen, at a 2x multiple premium above our 1-year Joshua CY Ng
forward target PER for the construction sector of 10-14x. (603) 92802151
joshuang@rhb.com.my
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27 May 2010
♦ Missed consensus. Excluding RM69m forex and disposal gains, adjusted FY03/10 net profit of RM263.6m
came in within our forecast but missed the market consensus by a whopping 15%.
♦ RM3.6bn outstanding construction orderbook. IJM’s outstanding construction orderbook currently stands
at about RM3.6bn with the key projects being Besraya Elevated Expressway (RM600m), Grand Hyatt Hotel in KL
(RM400m), Murum access roads (RM247m), water tunnel of the Pahang-Selangor Interstate Raw Water Transfer
project (RM230m), Seremban-Gemas double-tracking (RM200m), road projects in India (RM1bn) and building
jobs in the Gulf states (RM400m).
♦ RM2bn new orderbook guidance stands. It is confident about securing RM2bn new contracts per annum.
Locally, IJM is eyeing predominantly public projects including the remaining upstream packages of the Pahang-
Selangor Interstate Raw Water Transfer project (tenders submitted, pending evaluation), runway of the new
LCCT, Ampang and Kelana Jaya LRT line extension project, building jobs in Iskandar Malaysia, access roads to
the Second Penang Bridge, East Integrated Transport Terminal (EITT) in Gombak (PFI, reported to be worth
RM200m), teaching hospital at International Islamic University of Malaysia in Kuantan (PFI, believed to worth
RM400m) and selective project under the SCORE in Sarawak. On the overseas front, IJM’s key focus is on road
projects in India including the possibility of participating as concessionaires. YTD (FY), IJM has only secured
RM247m new jobs, i.e. the two Murum access road work packages. In our earnings forecast, we assume IJM to
secure RM2bn worth of new contracts in FY03/11.
♦ Murum access road project not “tactical”, but profit-driven. While we gathered from our sources that IJM
had won the two Murum access road work packages on “brutally competitive” prices, IJM assured that it “knows
the Sarawak market very well” and the job is not “tactical” but profit-driven. To recap, among the key risks of
the project are the hilly terrain (certain areas are 2,000 ft above the sea level), shortages and high prices of
aggregates (in excess of RM50/tonne vis-à-vis RM25-30/tonne in Kuching due to high transportation cost) and
that the quarries are tightly controlled by a number of local operators.
♦ Forecasts. Maintained.
♦ Risks. The risks include: (1) New contracts secured coming in below our target of RM2bn p.a.; and (2) Steep
increases in input costs.
♦ We are Neutral on the construction sector. On one hand, we foresee improved investors’ risk appetite for
construction stocks following: (1) The massive underperformance of the sector vis-à-vis the market in 4Q2009
and 1Q2010; and (2) A better sector news flow and new expectations leading up to the announcement of the
10th Malaysia Plan (10MP) in June 2010. On the other hand, certain negative elements remain such as: (1) The
still slow pace of the roll-out of public projects, shrinking margins and declining dominance of established players
in large-scale projects locally; and (2) The not-so-rosy outlook and increased operating risks in key overseas
markets (following the Dubai credit crisis, Dong’s devaluation and rising arbitration cases).
♦ Maintain Market Perform. Indicative fair value is RM4.88 based on 16x fully-diluted EPS of 30.5sen, at a 2x
multiple premium above our 1-year forward target PER for the construction sector of 10-14x to reflect: (1) IJM’s
group earnings that are resilient as reduced construction profits in the event of sharp increases in construction
input costs will be cushioned by higher plantation profits during a commodity price upcycle; and (2) IJM’s largely
trouble-free position as it is not involved in any major arbitration cases in the overseas market.
Construction PBT margin 2.1% 2.1% 0.0% pt Weighed down by older contracts secured prior to the sharp rise in input costs.
EBIT margin 14.3% 16.9% 3% pts
Pretax margin 11.5% 14.4% 3% pts
Effective tax rate 24% 27% 3% pts
Construction PBT margin 2.1% 1.4% 2.2% 3.1% 1.0% pt We believe helped by some new contracts that carried higher
margins.
EBIT margin 14% 17% 22% 16% (6% pts)
Pretax margin 11% 12% 17% 19% 2% pts
Effective tax rate 30% 31% 29% 19% (11% pts)
Turnover 4,013.5 5,984.4 5,585.6 5,483.3 Construction EBIT margin (%) 8.0 8.0 8.0
Turnover growth (%) New orderbook secured 2.0 2.0 2.0
-12.8 49.1 -6.7 -1.8 (RMbn)
IMPORTANT DISCLOSURES
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(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.
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investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.
The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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Stock Ratings
Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.
Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.
Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.
Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.
Industry/Sector Ratings
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.
RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.
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actions of third parties in this respect.
A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 5 of 5
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